The current rash of internet trading exchanges will settle down into a more tailor-made and rather sparer networking model as systems mature says Gillian Law There's been a lot of hype surrounding online exchanges ­ a new food industry exchange seems to appear every other week each claimed to be the answer to managing the supply chain online ­ but little analysis of their longevity, usefulness or even legality. So what is the next step in the world of exchanges? What will they look like? How can businesses choose between them? And will any of them still be out there in two years' time? Exchanges, loosely speaking, are digital marketplaces where companies can go with a shopping list or with a range of goods available for sale. By centralising information and eventually tying in their own stock systems to the exchange, buyers and salespeople ought, theoretically, to be able to put their feet up and let Hal do all the work. My computer will track how much sugar I have in stock for making boiled sweets. When stocks are running low, it will check with your computer, and all the other sugar suppliers' computers, to see who has the best deal. Once it finds what it wants, it will buy it, and the delivery will turn up at my door before I know I need it. Well, that's the theory. In reality, exchanges are in their infancy and no one knows which will survive or what services they'll actually end up offering. You might not want me to have direct access to your prices, or to open up that information to your competitors. You might have joined a different exchange and not get my business at all. There's a lot of consolidation and development ahead until business to business retail exchanges really come into their own. And the real benefits of doing business this way will be about more than getting the best deal. But for the time being exchanges will continue to spring up. Some industry analysts forecast 4,000 exchanges by 2003, followed by serious consolidation shrinking that figure to between 500 and 1,000 by 2004. Most will move from being retailer or supplier-run to operating as independent businesses, sold off or floated by their original developers, and taking transaction or value based fees from users. Jeff Beech is an Andersen Consulting partner and expert in b2b exchanges. "You need a clear and concise value proposition, and you have to be neutral," he says. "A good portal won't be supplier or seller based, but independent. Its governance structure, leadership and economic structure will also have an influence on whether it's one of the ones that succeeds." Those that survive will act as an open market connecting buyers with suppliers. "Neutrality isn't necessarily a popular idea. A lot of [current] exchanges have a specific constituency with a lot of clout which gives them an advantage in economic and negotiation terms." That will put off other companies who want to do business with them but fear they will be disadvantaged. And exchanges that cover the same areas will merge or drop out. Already, he says, capital markets are getting wary of new exchanges particularly those that duplicate or overlap with existing operations. Neutrality also helps to defend against accusations of anti-competitive behaviour. The United States Federal Trade Commission is currently looking at the antitrust implications of exchanges, particularly the three largest being set up by the US car companies, airlines and aerospace firms. Instead of creating an open, transparent market, say concerned market watchers, exchanges could just as easily be used to set up cartels and handle price fixing. The results of those inquiries, and of the Competition Commission's current investigations into UK supermarkets, will either calm things down or cause even more close scrutiny of retail exchanges. An exchange run by a third party, neither buyer nor seller, might be able to avoid those accusations. Beech believes that once the rash of exchange building settles down and most drop out of the market, the survivors will look very different to those around today and even those currently planned for the future. "People will create looser exchanges," he predicts, through companies "linking together the systems they already have, with competitors as well as suppliers and buyers". Extra services like procurement and supply chain planning can be built into that model, he says. They could be run by outside providers under a white label' alliance: users accessing the exchange can use them without ever knowing who is providing the technology and service behind it. Spencer Marlow, marketing manager, retail supply chain at GE Global eXchange Services, agrees that the current form of exchanges will change as companies link in their proprietary systems. As he discusses on page 33, Marlow believes it's unlikely that exchanges will create a utopia of companies, suppliers and buyers, all joining in one happy band with freely available information. Companies will still want to use their own systems for some areas, and will still want to control who sees what information and be able to offer "special" prices to different customers without that information being made public. "Retailers, for example, are going to want to keep their competitive advantage ­ so they might get together, buy the technical expertise they need, and then go off into their corners and do it their own way. A collection of extranets, if you like." The structure of an exchange will be an organic' thing, developing as companies add on what they want. "The exchange itself will be the central platform," he says, "with lots of other systems hanging off that and a central forum where discussion can take place." As for neutrality, Morley suggests there will be a role for companies offering community management', whereby they control passwords, monitor who has access to the sites, and so on. Retailers and manufacturers don't have that sort of experience, he says, so a neutral technology provider can keep things straight. There have been three main drivers behind the growth of exchanges, says Doug Duffin, a senior retail consultant with management consultancy and IT services company Cap Gemini Ernst & Young. Firstly, shareholder demands that companies develop a b2b e-business strategy. "That explains a lot of the rush to sign up," he says, "and much of what we're seeing is just agreements of intent rather than anything more solid." Then there's the promise of reduced supply chain costs ­ difficult for any company to ignore. "And thirdly, there's the entrance of Wal-Mart into the UK market. Wal-Mart is the granddaddy of collaborative planning with its own large trading exchange, and other companies are looking at how they can follow that." Andy Bolton, regional director for consumer and pharmaceutical industries, Oracle's solution leader for e-procurement, says the simplification of the technology is also a driver as it becomes easier and cheaper for companies to get involved. And then there are the cost savings, which Bolton says can be huge. "E-procurement systems have the highest return on investment of any e-commerce investment," he says. "Companies tend to have procurement systems established for regular purchases, but they buy a huge number of one-off products that aren't tracked or analysed." Bolton estimates that up to 20% of goods and services bought by the average company would fall into this category. "That's where e-procurement can bring real benefits. Over three quarters of the time spent in procurement is in straight operational, clerical work." Using e-procurement, he says, can reduce that cost enormously, from an average of US$115 per transaction to just US$33, or even US$6 for the best systems. Exchanges should make these savings available to everyone in the chain, he says, after the "initial focus on squeezing suppliers shakes out and more strategic plans develop". The two big challenges, says Duffin, will be getting everyone to work together instead of having disparate systems ­ the situation developing at the moment ­ and integrating the exchanges with current company systems. He believes both will happen as companies start to recognise how exchanges can work for them. On the systems side, many companies will need to invest if they're to keep up at all, he says. Lots of retailers and manufacturers are muddling along with legacy systems that could simply collapse in a larger scale environment, he says. "They have to take a good look at their systems and architecture before going ahead." And as for which exchanges will survive, Duffin doesn't expect to see retailers jump ship from any one exchange to another ­ especially not from the ones they've set up themselves to join a manufacturer run offering like Transora. Transora (see box right) was initially seen as the suppliers' counter-punch: run by 49 powerful fmcg manufacturers, it does give the suppliers more clout, but only if it can get retailers to actually use it. Instead, he says, the exchanges will slowly form links with one another to offer what customers need. Everyone in the supply chain will just have to keep up with developments, know what exchanges are out there, and get involved with those that fit with their own systems and needs. And of course, he says, retailers will have to watch out for a whole new threat from manufacturing based exchanges ­ what's to stop the suppliers just cutting out the middle man and selling direct to the consumer? The speed of change is only going to get faster. n {{FEATURES }}